Retire and remain: Sellers seek greater flexibility in succession planning

As the advisor population ages and more advisors start creating their succession plans, flexibility has become a bigger topic of conversation in recent acquisitions. Retiring advisors want to create their own plans for exiting the business and in many cases, they want it to be on their terms. There is often wide latitude given to sellers, and while some advisors choose to sell their practices and retire, others wish to remain for a specific time and work for the new owners.

This is a growing trend. When we look at our M&A data from 2016 to 2022, we see that Commonwealth helped buyers and sellers facilitate 359 buy-sell deals. Immediate retirement accounted for 205 of these deals. Remain deals and partial sales, which allow more flexibility for the sellers, accounted for 121 of the total deals — roughly a third.

Clearly, this trend is becoming a bigger part of the discussion, so we want to highlight a few pros and cons for both the buyer and the seller when it comes to retiring and remaining at a firm.

PROS OF A RETIRE-AND-REMAIN STRATEGY

For the buyer. Advisors who have purchased a block of clients want to retain them — that’s their top priority. Having the former advisor remain visible at the firm is a great way to introduce clients to the new advisors, ensuring that the goodwill toward the selling advisor is easily transferred to the buying advisor. There’s also a halo effect: A client who loved their advisor may be willing to transfer that goodwill to the chosen successor firm, especially with the advisor still at the firm.

For the seller. Many advisors delay retirement because much of their identity revolves around being a financial advisor, and they aren’t sure who they'll be when that role ends. Staying at a firm for a period allows the selling advisor to ease into retirement with fewer responsibilities and offers an opportunity to say goodbye to clients they’ve known for years.

Often, a selling advisor can also maximize any incentives written in the buy-sell agreement, such as retention goals or bringing in new clients or assets. The best agreements allow everyone to benefit when things go well, and selling advisors are often compensated for their consulting services.

CONS OF A RETIRE-AND-REMAIN STRATEGY

For the buyer. When a selling advisor has built up a successful practice over time, they may want to have a hand in how the combined firm runs. While this is well-intentioned, there are instances where the “helpful” feedback from the selling advisor doesn’t sit well with the buyer and staff. It’s important to have an honest dialogue about roles and responsibilities to avoid unnecessary conflicts.

Similarly, a retiring advisor may follow a different investment philosophy or client service model than the buyer. These aspects should be discussed before the selling advisor remains onboard so the buyer feels comfortable making changes to serve their clients.

Another consideration for the buyer is that their cash flow may be constrained since they’re simultaneously buying a business while retaining a highly compensated employee (the seller). Buyers can be creative with how they negotiate the financing terms, timing, compensation and valuation to alleviate cash flow restrictions. So it’s critical to construct a pro forma to understand the financial implications of a deal, particularly during the initial years of a buyout.

For the seller. After decades of being in charge, it can be hard to let go of the reins. But the most successful transitions happen when the retiring advisor has a plan and a purpose, something they want to do when they finish working. If an advisor wants to travel, they should plan some trips while they're still working to see what’s involved. If their goal is to volunteer for a charity, there are many ways they can participate and get their feet wet before retiring.

For both parties. Expectations around time frames are often misaligned. Sellers tend to push their retirement date further than originally intended, and buyers tend to accept flexible terms and time frames to win an acquisition. This mismatch can create friction between the two parties, so it’s important to be explicit about the timeline expectations. Ideally, flexible guardrails can be embedded within the actual buy-sell agreement.

A SEAMLESS SUCCESSION

Ultimately, the best succession plans are built around synergy and compatibility, a sense of shared purpose, and a commitment to taking care of clients. And when buyers and sellers can agree on these important fundamentals and remain flexible, many of the other pieces easily fall into place.

Kristine McManus serves as chief advisor growth officer at Commonwealth Financial Network.